Morning Commentary: A Relief Rally – How Long is the Question

Foreign Exchange - Morning Commentary

A Relief Rally – How Long is the Question

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Alan Rose
Alan Rose
Foreign Exchange Head Trader
At the G20 meeting in Argentina this past weekend, the U.S. and China have reached a temporary truce (90 days) over tariffs that has been greeted with a short term relief rally for equities, currencies, commodities, and rising interest rates. A de-escalation of trade tensions between the two biggest economies of the world, combined with a dovish turn by the Fed last week, should provide a positive backdrop to start the week.
The U.S. will suspend imposing raising tariffs from 10% to 25% on $200 billion of Chinese exports implying more breathing room for the two key countries to work out a longer term agreement. The bilateral truce is a particular relief to makers of products not yet targeted by the U.S. and China like Apple products and further tariffs on U.S. agricultural products that have hurt the U.S. farm belt.
The key question will be how long this rally lasts in the face of recent data showing continuing economic weakness in China, EZ, and recent weakness in key sectors of the U.S. economy (housing, autos, and jobless claims). Recent economic softness and poor earnings, combined with central banks withdrawing liquidity from the markets, are part of the reason why the U.S. and global equities have been dealing with so much angst and anxiety since October 1.
Further insight into the disposition of investors and traders will come this week when Fed Chairman Powell testifies before Congress on Wednesday, and the U.S. jobs report will be released on Friday morning.
  • Oil prices are up sharply this morning (4%) on the back of news that Alberta is cutting back on oil output and Russia and Saudi Arabia have agreed to support the price of oil into 2019. The news was not all upbeat in that Qatar announced that it would be leaving OPEC in January.
  • EZ final PMI manufacturing readings came in better than expected at 51.8 from 51.5 driven by improvements in Spain, France, and Germany. Italy’s PMI worsened to 48.6 and underscores the growing problems the Italian economy is facing.
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